Back in the 1980's there were a series of commercials about Bo Jackson knowing Nike shoes, which became to be known as the "Bo Knows" series. The implication was that if anyone knew anything about sports shoes that would make one a great performer it was Bo Jackson. Bo Jackson in our opinion still reigns as the greatest athlete to ever live in this planet. Well taking off from that idea let me do a posting on "Bob knows Bonds", or more specifically municipal bonds. We might not be in Bo's league, but as we mentioned back in the early series of this blog our mentor Tom Pace taught us a good bit about municipals for many years and that knowledge allows us to sit down at our current bond broker and pick out the good stuff from the not so good stuff. Few people can do that and few know bonds like we do.
We started buying municipal bonds in the summer of 1979 and have had municipal bonds in our portfolio ever since. We guess over the span of 34 years we have bought literally 200 plus bonds. Our current portfolio has 54 different bonds, all from different issuers, all from North Carolina issuers, in varies amounts. We have some general obligation and some revenue bonds. GO's are bonds issued with the tax authority of the issuer generally a town or county for schools or other non revenue backed entities. Revenue bonds are just that bonds backed by some revenue source such as a power plant, water and sewer, hospital, airport, etc. For many years GO's were considered not as safe as revenue bonds, but we are not sure if that is so anymore. We just did a posting on just that idea.
Safety is the key here in that municipals in our opinion are just as safe as US Treasuries. Truth be the US is a AA credit risk, the State of NC is a AAA credit risk. But credit ratings aside I believe for instance bonds issued by Carteret County NC as a example are safer than most anything else since their GO's are backed by millions and millions of high priced real estate on the beach that can be taxed to pay interest and principal. Let's look at a revenue bond for say the Raleigh Durham Airport which can add whatever is needed to the price of a ticket to pay interest and principal on their bonds. Nobody can move the real estate and the airport is not going out of business. Both bonds are safe and dependable interest payers long term.
The best part of holding municipal bonds is that they are triple tax free. No federal tax, no state tax, no local tax. Add in that good municipals can be bought right now for par yielding 5.0%. That equates to 7.35% taxable at federal and current North Carolina margin income tax rates. Not bad for good income and much better than US Treasuries which are federally taxed. The key here is to buy INDIVIDUAL bonds and not bond funds. Holding bond funds you are subject to the ups and more importantly the downs of bond values. If you hold bonds funds currently you know what we mean in that your asset value has taken a hit. Asset values go down when interest rates go up. Holding bond funds means you get hit with that pending loss in value and are subject to the deposition of those bonds by the bond fund manager. Holding individual bonds means that even if those values go down you can hold the bond until maturity and still get your full principal back. The key is buying for the tax free income.
Yesterday we bought 4 bonds. One from Durham County, one from Asheville, one from Haywood County, and another from Raleigh NC. All yielding in excess of 4.5% and all safe as can be. We will sleep well at night and enjoy the income from these bonds for many years. In fact one of these bonds matures in 2047 and unless God blesses us with an extraordinary long life we will not be here to accept the principal back. But 5.0% tax free sounds good to us for 34 years or less whichever comes first. We suggest you consider municipals for a long term portfolio by buying your first one today and adding to them as funds allow and slowly building a portfolio.
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